Cash Flow Yield
For some debt products such as mortgage-backed securities, we calculate cash flow yield instead of yield to maturity. This is because investors in mortgage-backed securities receive their cash flow from the cash flow of the underlying collateral pool and this cash flow is not fixed. In the underlying collateral pool, the home owners make the payments for the loans they have taken which acts as the cash flow to mortgage-backed securities. However, the homeowners can prepay their loans based on the changing interest rate conditions. This will affect the principal and interest payments to the MBS. Since the cash flow is uncertain, typically an assumption is made about the prepayment rate, and based on that cash flows are estimated. This cash flow is then used to calculate the cash flow yield.
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